GNC 2012 Annual Report Download - page 13

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Table of Contents
pay an initial fee of approximately $25,000 for a franchise license for each full size store and continuing royalty fees that vary depending on the country and
the store type. Our international franchise program has enabled us to expand into international markets with limited capital expenditures. We expanded our
international presence from 961 international franchise locations at the end of 2006 to 1,590 international locations (including distribution centers where retail
sales are made) as of December 31, 2011. We typically generate less revenue from franchises outside the United States due to lower international royalty rates
and the franchisees purchasing a smaller percentage of products from us compared to our domestic franchisees.
We enter into development agreements with international franchisees for either full-size stores, store-within-a-store locations, wholesale distribution
center operations or internet distribution rights. The development agreement grants the franchisee the right to develop a specific number of stores in a
territory, often the entire country. The franchisee then enters into a franchise agreement for each location. The full-size store franchise agreement has an initial
ten-year term with two five-year renewal options. At the end of the initial term and renewal periods, the franchisee typically has the option to renew the
agreement at 33% of the franchise fee that is then in effect. Franchise agreements for international store-within-a-store locations have an initial term of five
years, with two five-year renewal options. At the end of the initial term and each of the renewal periods, the franchisee has the option to renew the agreement
for up to a maximum of 50% of the franchise fee that is then in effect. Our international franchisees often receive exclusive franchising rights to the entire
country franchise, excluding U.S. military bases. Our international franchisees must meet minimum standards and duties similar to our U.S. franchisees.
Manufacturing/Wholesale
Our Manufacturing/Wholesale segment is comprised of our manufacturing operations in South Carolina and our wholesale sales business. This segment
supplies our Retail and Franchise segments as well as various third parties with finished products. Our Manufacturing/Wholesale segment generates revenues
through sales of manufactured products to third parties, and the sale of our proprietary and third-party brand products to Rite Aid, Sam's Club, PetSmart and
www.drugstore.com. Our wholesale operations are supported primarily by our Anderson, South Carolina distribution center.
Manufacturing
Our sophisticated manufacturing and warehousing facilities provide finished products to our Retail and Franchise segments and enable us to control the
production and distribution of our proprietary products, better control costs, protect product quality, monitor delivery times and maintain appropriate
inventory levels. Our unique combination of in-house development of products, vertically integrated infrastructure and innovation capabilities support our
business strategy and enable the rapid development of proprietary products.
We operate two main manufacturing facilities in the United States: one in Greenville, South Carolina and one in Anderson, South Carolina. We utilize
our plants primarily for the production of proprietary products. Our manufacturing operations are designed to ensure low-cost production of a variety of
products of different quantities, sizes and packaging configurations while maintaining strict levels of quality control. Our manufacturing procedures are
designed to promote consistency and quality in our finished goods. We conduct sample testing on raw materials and finished products, including weight,
purity and micro bacterial testing. Our manufacturing facilities also service our wholesale operations, including the manufacture and supply of our proprietary
and third-party brand products to Rite Aid, Sam's Club, PetSmart and www.drugstore.com. We use our available capacity at these facilities to produce
products for sale to third-party customers.
The principal raw materials used in the manufacturing process are natural and synthetic vitamins, herbs, minerals and gelatin. We maintain multiple
sources for the majority of our raw materials, with the
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